WASHINGTON — The U.S. economy grew at an annual rate of 2.1% in the final quarter of last year, but damage from the spreading coronavirus is likely depressing growth in the current quarter and for the rest of the year.
The overall pace of growth in the October-December quarter was unchanged from its initial estimate a month ago, though the components were slightly altered, the Commerce Department said Thursday. A slowdown in business restocking was less severe than first believed. But a cutback in business investment in new equipment was more of a drag on growth than initially thought.
Economists have been downgrading their forecasts for the first quarter of this year as fears of the impact of the virus has escalated. Stock markets have plunged this week on news that the number of coronavirus cases worldwide has now topped 81,000.
On Thursday, the Dow Jones Industrial Average plunged 4.4%, intensifying a weeklong market rout as investors worried that the coronavirus outbreak will seriously damage the global economy.
The virus, which started in Wuhan, China, has spread to more than 30 countries, including the United States, Italy and South Korea.
Vital supply chains from China that companies in the United States and elsewhere depend on have been disrupted, and that problem is expected to worsen. Microsoft and Apple have warned about adverse impacts from the supply chain disruptions.
U.S. companies with sizeable operations in China are being impacted directly. McDonald’s has closed hundreds of stores there. Starbucks has closed more than half of its locations. While it’s begun to open stores in China where the outbreak has abated, it is now spreading faster outside of China.
In a report to investors Thursday, Goldman Sachs said the fallout from the virus would likely wipe out all the earnings growth it had been predicting for 2020 if the virus continues to spread. David Kostin, a strategist for the firm, said his baseline estimate is now for zero growth in S&P 500 earnings per share this year, down from an earlier forecast of 5.5% earnings growth.
The rising fears about the economic damage the virus can do have inflicted the worst losses on U.S. stocks in two years, less than a week after Wall Street was hitting record highs. To try to demonstrate the government’s resolve to deal with the spread of the virus, President Donald Trump announced Wednesday that he was appointing Vice-President Mike Pence to take the lead in co-ordinating U.S. actions.
But economists are warning that if the virus turns into a global pandemic, the impact could be severe enough to push the global economy and the U.S. economy into recessions.
“The global economy was already very weak because of the trade war, and it would not take much to shove it on its heels,” said Mark Zandi, chief economist at Moody’s Analytics.
Zandi said his baseline forecast, which optimistically assumes that the outbreak remains largely contained in China and dissipates by spring, projects that global growth will slow to 2.4% this year — 0.4 percentage point lower because of the virus.
He expects the annual pace of U.S. growth to slow to 1.3% in the current quarter, down by 0.6 percentage point because of the virus. He said for the year, he is forecasting U.S. growth of 1.7%. That would be the slowest annual growth of the Trump presidency and far below the 3%-plus growth that Trump had promised to deliver during the 2016 campaign.
Because of the market turbulence and the rising potential of adverse effects from the virus, expectation of interest rate cuts by the Federal Reserve have risen. The CME Group tracker of investment sentiment has put the possibility of a quarter-point cut as early as March at 37%, up from just 7% a week ago.
Diane Swonk, chief economist at Grant Thornton, said the possibility of two rate cuts this year “has gone up dramatically” because of the virus threats.
Until recently, many economists had expected that the Fed could keep rates unchanged the whole year after three rate cuts last year, when it was struggling to cushion the impact of Trump’s trade war with China and a slowing global economy.
The estimated 2.1% annual growth pace in the October-December quarter followed an identical gain in the third quarter. For 2019 as a whole, the economy grew by 2.3%, the slowest pace since a 1.6% increase in 2016.
Trump is counting on a strong economy to propel him to re-election in November. But for each year of his presidency, economic expansion has fallen below the levels he had promised to deliver during the campaign, when he derided the growth rates achieved under President Barack Obama.
While growth did jump to 2.9% in 2018, propelled by the 2017 tax cut and increased government spending, it returned last year to near the average achieved by Obama.
Thursday’s report from the Commerce Department was its second of three estimates of economic growth for the October-December quarter. It showed that consumer spending, which accounts for 70 per cent of economic growth, grew at a 1.7% annual rate in the fourth quarter, down from an initial estimate of 1.8% growth.
Business investment on new plants and equipment was also lower, falling at a 2.3% rate, worse than the initial estimate of a 1.5% drop. These weaker numbers were offset by more business restocking of store shelves and upward revisions to residential investment and federal government spending.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
